Liquidation – a valid way to build personal wealth?

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A friend of mine in another country brought to my attention a company that is currently under voluntary liquidation – an act that reminded me of how often I’ve seen this tactic used as a convenient way of enriching oneself at the expense of others.

And isn’t enriching yourself at the expense of others in this way little more than fraud?

The problem here is that liquidation laws are necessary for a business in trouble to find a way to most fairly compensate all its creditors and close (or, in some cases, restructure) before it incurs further problems, resulting in even bigger losses for the creditors.

However, some unscrupulous people will start a business, build it over a few years to gain the trust of its suppliers and customers, and then at a point where the cash-flow starts to become problematic, put the business into voluntary liquidation and walk away from the debts. In the meantime, of course, they have paid themselves substantially in terms of salaries and bonuses – in effect, living extremely well off their creditors that are then left behind holding the proverbial baby.

While it is possible, in law, to go after these individuals and sue them for their personal assets to cover the delinquent debt, this is extremely expensive and, in order for the action to be successful you generally have to prove some form of wilful intent: always a tough thing to do, even when all the circumstantial evidence might point that way.

So, having accumulated a handy sum from this now-defunct business, they start again – looking for new victims. Mind you, some are brazen enough to start again in the same line, asking the same creditors for credit – and often, these creditors fall for it the second time, thinking that they will somehow be repaid from the profits of the new business…

And yet, these self-same businessmen will tell you that there are no victims here as their suppliers are (generally) covered by credit insurance and so will be paid out, while the credit insurer should be able to recover its money from the receivables (if it was that simple, why are they liquidating in the first place?)!

The fact is that credit insurance almost never covers the full debt, so the suppliers have a significant shortfall. On top of this, the insurance premiums invariably rise – the insurer has to covers its losses somehow, after all – and is also wary of that sector so withdraws/reduces cover for smaller, generally honest, businesses that then face genuine cash-flow crunches and may have to fold as well.

Victimless? Certainly not.

So, my question to you is this: do you believe this sort of action is legitimate, or should laws be framed to ensure that such action results in the forfeiture of assets by the liquidating party to cover the shortfall?

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2 responses to “Liquidation – a valid way to build personal wealth?

  1. This kind of things have been going on, one way or another, since time immemorial. If you legislate against one way of doing it another will be found. People are greedy and these kind of individuals always find new ways of getting money for nothing.

    • I think one needs to have legislation to make those that put their company into voluntary liquidation personally accountable, so as to discourage the practice.

      Liquidation, properly done, is a necessary part of the business environment; it’s the crooks that cause a lot of pain for everyone else.

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